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On Aug 19, we upgraded our recommendation on hhgregg, Inc (HGG - Analyst Report) to Outperform from Neutral on the back of improved first quarter fiscal 2014 results.

Why the Upgrade?

On Aug 5, 2013, hhgregg reported a loss of 4 cents per share in the first quarter of fiscal 2014, narrower than the prior-year quarter loss of 16 cents per share. The reported loss was also narrower than the Zacks Consensus Estimate of 15 cents loss per share.

The narrower loss was driven by comparable store sales growth and cost cutting measures. A decrease in selling, general & administrative expense (SG&A) ratio and a decline in net advertising expense ratio also contributed to the improvement in first quarter results and managed to offset the impact of a decline in gross margins. Outstanding share count declined 13.6% in the quarter, which contributed to earnings growth.

hhgregg’s net sales beat the Zacks Consensus Estimate and climbed 7.2% year over year, driven by comparable store sales growth and the addition of 18 new stores in the last 12 months. Comparable store sales were backed by the strong performance of the appliance category.

Why the Strong Positive Bias on the Company?

hhgregg’s overall growth story looks compelling. This appliance and electronic retailer has turned its business around with the help of several strategic initiatives. These initiatives have pulled the company out from the continued weakness in the consumer electronic category, which had been suffering since the past few quarters and therefore hurting the overall sales of the company.

In response to the decline in overall comparable store sales, largely resulting from the performance of the consumer electronics category, the company has developed three major initiatives for fiscal 2014 to drive additional traffic and sales. These include steps to increase market share of its appliance category; increase its customer base through advertising campaigns and greater focus on promoting consumer electronics through compelling offers. hhgregg also intends to increase category sales through its website capabilities.

We believe that all these initiatives have contributed to the first quarter results and are expected to drive profitability in the coming quarters.

Following the release of its first quarter results, the Zacks Consensus Estimate for 2014 has gone up 7.1% to 90 cents per share. Moreover, the Zacks Consensus Estimate for 2015 has also climbed 9.1% to 96 cents per share.

Other Stocks to Consider

hhgregg holds a Zacks Rank #1 (Strong Buy). Other stocks in the retail sector that are performing well and are therefore worth considering include Green Mountain Coffee Roasters Inc (GMCR - Analyst Report), Haverty Furniture Cos. Inc. (HVT - Snapshot Report) and Fortune Brands Home & Security (FBHS - Snapshot Report), all of them holding a Zacks Rank #1.

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